Friday 15 October 2010 19.05 EDT
First published on Friday 15 October 2010 19.05 EDT

The last 20 years have been a time of faith, but this faith was not a traditional religion; it was a theory of rational choice, according to which markets are self-regulating as long as governments do not tamper with them.

History shows that markets are as prone to bouts of insanity as any other field of human activity, but the notion that they embodied a superior sort of rationality not accessible to ordinary people had many attractions. It reinforced the suspicion of politics, suggesting we would be better off being governed by experts – which many politicians went along with, since it allowed them to shuffle off responsibility for their decisions. Economists were figures of authority, whose cool academic minds were unclouded by murky passions. Being so rational , they were qualified to understand the workings of rational choice in markets.

Faith looks like reason when dressed up in complex equations, and a great many people were converted to the new religion of market economics. The best economists have always been sceptical. A supremely perceptive thinker and an investor, John Maynard Keynes, wrote that markets can remain irrational for longer than we can remain solvent – an insight that was lost in the late boom. Some economists have developed theories of behavioural finance, which try to explain the irrational decisions of investors. But the insight that entire markets can go mad for extended periods seems confined to successful speculators, many of whom never studied economics.

In recent times economics has been a religion – and a remarkably silly one – rather than a type of intellectual inquiry, and now that this cheap little creed has been exposed by events it is worth asking what genuine faiths can do to increase our understanding of economic life. In one form or another, this is the question addressed by all the contributors to this timely volume.

Larry Elliott introduces Crisis and Recovery with a wide-ranging analysis of the historical context of the crash, making it clear that: "There is no more chance of 'business as usual' than there was of the war that started in August 1914 being all over by Christmas." The long Edwardian summer of the 1990s and early 2000s, which passed in the shade of the crumbling edifice of American power, is definitely over. History is on the move, and the crude beliefs about how human beings think and act that prevailed in recent times are no longer viable.

The Archbishop of Canterbury, Rowan Williams, makes the point that the contribution of theology to the debate is not just to add another dimension to the world of fact – rather, it is to expose the assumptions that are hidden underneath our existing understandings. Simple-minded conceptions of rational choice are pretty useless in most areas of life, so why should anyone think these crude notions could enable us to understand markets? The answer is that human agency has been reduced to a process of calculation, leading to an ethically impoverished and deeply unrealistic view of society.

Economics was not always so crude, and in his contribution, Adam Lent (head of the department of economic and social affairs at the TUC) makes a convincing case for the relevance of John Stuart Mill. A logician and political theorist and greatly influential economist, Mill perceived that want-satisfaction in the marketplace was not the same as self-development – the result could well be suffocating uniformity. The Labour MP John Cruddas and Jonathan Rutherford, editor of Soundings magazine, make a similar point when they argue that a conception of choice much richer than that of neo-liberal philosophy can be found in an early 20th-century liberal thinker, LT Hobhouse. John Reynolds, a theology graduate and now an investment banker, argues persuasively that legalistic compliance is not enough when dealing with market abuses: ethics are intrinsic to markets, which stop working when clients and counterparties can no longer trust them. Andrew Whittaker, General Counsel to the board at the Financial Services Authority, notes that the causes of the crash were not just in misjudgments of risk: they also included a popular culture that dreamed of "life in the fast lane".

These deeper causes of the crash suggest a degree of caution about how far we can hope to avoid further collapses. Phillip Blond, writer and senior lecturer in theology and philosophy at the University of Cumbria, thinks a wholly different type of economy will be needed, based on common ethical values – presumably, those of his version of Christian radical orthodoxy.

But is this imaginable at a time when globalisation has created a market that includes not only countries shaped by monotheism but also those moulded by Confucianism, Hinduism, Buddhism and other religions? The impact of globalisation arises again in Robert Skidelsky's incisive essay on Keynesian political economy. He tells us that Keynes "would have wanted a major reform of the international monetary system", and that without such a reform, nothing else will work. No doubt this is true, but the postwar monetary system was an artefact of American hegemony. With China and the US locked in a currency war, nothing of the kind looks possible today.

Arguing rightly that the world economy has a dysfunctional relationship with the planet, Zac Goldsmith concludes his contribution by citing fellow-conservationist Glenn Prickett, senior vice president at Conservation International: "Mother Nature doesn't do bailouts." It is a fact that nearly all economists, obsessed with the narrow human world and believing it to be self-sufficient, prefer to forget.

Whether or not you follow any traditional faith, this interesting and illuminating collection will leave you healthily sceptical of faith-based economics.

John Gray's next book, The Immortalization Commission: Science and the Strange Quest to Cheat Death, will be published by Allen Lane in January.